Question

California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the beginning of 2020. All remaining shares are common stock. The company was not able to pay dividends in 2020, but plans to pay dividends of $100,000 in 2021.

Answer 1

An investor would calculate the present discounted value (PDV) of future dividends to determine the price per share of Babble, Inc. stock, factoring in a 15% interest rate. In this case, after performing individual PDV calculations for the expected profits, the price per share is estimated to be about $256,500.

Step-by-step explanation:

In the case of Babble, Inc., an investor's decision on how much to pay for a share of stock will depend on the present discounted value (PDV) of the future dividends. The company is expected to disburse profits as dividends immediately ($15 million), in one year ($20 million), and in two years ($25 million). Since these dividends will be paid out at different times, they must be discounted to account for the time value of money at an assumed interest rate of 15%. A separate PDV calculation is required for each time period.

After calculating the PDV for each of the expected dividends, we add these amounts together to arrive at the total PDV of the profits, and then we divide this number by the total shares (200 shares in this case) to determine the price per share. In this hypothetical example, the price per share comes out to be approximately $256,500 per share.

Answer 2

See below.

Step-by-step explanation:

Since the preferred stock is not cumulative only the current years' dividend is payable on these stocks.

Preferred stock dividend = (5000 * 100) * 0.08 = $40,000

Of the declared dividend of $100,000,

Preferred Dividend = $40,000

Ordinary share dividend = $60,000

If the shares were cumulative, the prior year dividends would also be payable form the declared dividends bringing the total preferred dividend to $80,000.

Hope that helps.